South Africa's Minister of Finance Nhlanha Nene (pictured left) yesterday announced lower tax rates for micro enterprises that qualify for a special tax dispensation. These form part of a number of tax concessions for small businesses that the government is busy putting into effect. But do these concessions really go far enough?
Presenting this year's Budget in Parliament yesterday Nene revealed that micro enterprises registered for a special turnover tax (eligible for firms with an annual turnover of up to R1 million) will be able to benefit from reduced tax rates.
The new measures - which include increasing the threshold up to which qualifying firms don't have to pay tax, from R150,000 to R335,000 a year, and lowering the maximum rate from 6% to 3% - follow recommendations made last year in a report by the Davis Tax Committee (to see the National Treasury's tax guide for 2015 click here).
To complement this, the South African Revenue Service (Sars) would also set up small business desks in its revenue offices to assist in complying with tax requirements.
In addition new rules for the venture capital (VC) tax incentive will also come into effect from March 1, while grants given to small businesses will be tax-exempt and organisations involved in supporting small firms will get tax relief through a dedicated tax provision (also effective from next month, click here to view the details of these).
Not much to lose
The National Treasury has little room to introduce any major tax concessions, with the economy expected to grow by just 2% this year and 2.6% next year which has impacted on revenue collection (which is expected to fall short by R14.7 billion in the 2014/15 tax year).
But it can however afford to offer micro enterprises more tax concessions because the tax netted by the turnover tax is very small (it accounted for a few million rand in 2013/14 compared to R179 billion from corporate tax in the same year). Fewer than 10,000 micro firms had subscribed to it as of last year (this previous post considers an option from Brazil which might help attract more interest in the tax).
SBC move is strange
Yet amid all these concessions The National Treasury meanwhile has decided to do something very strange - to do away with Small Business Corporation (SBC) tax from January next year. A tax credit will take its place (based on the recommendations from a report by the Davis committee). Just 112,170 firms were assessed under the regime in 2012 tax year, according to the National Treasury.
The scrapping of SBC next year in favour of a tax credit however may hurt job-creating small businesses (see this previous post). Instead what is effectively a free grant will be disbursed to all small businesses.
While SBC will be scrapped rather than expanded to include more firms, other countries like Chile and Brazil (which has a similar graduated tax system for small businesses as South Africa) have expanded their special tax dispensations for small enterprises.
In addition Malaysia, according to the country's small business support agency SME Corp, will from next year cut its corporate tax rate for companies with paid up capital of up to RM2.5 million ($690,000), from 20% to 19%.
Following Chile's tax reform last year the turnover threshold for those firms that can qualify for a special small business tax (Article 14 Ter of the Income Tax Act) has been doubled to $1.2 billion Chilean pesos ($1.9 million).
In Brazil the government there last year extended the scope of a small business tax (Simples) to a further 140 business categories for firms which have a turnover of up to R$3.6m ($1.25m). Those that fall in these categories had until January 31 to register.
At least 459,200 companies applied to join by January 30. The figure is double the average number of firms that have entered the special tax system per year (223,000) over the last four years, Brazil's small business minister Guilherme Afif Domingos (pictured above, right) said earlier this month.
A study by Brazilian think tank the Getulio Vargas Foundation revealed that the state would lose R$3.9bn with the extension of Simples, but Domingos argues that should a firm that is part of the special tax system grow their income by just 4%, this would reduce the entire expected loss to the fiscus.
It all makes one wonder if the South African government shouldn't be more bold with tax incentives and tax breaks for small businesses.
But one thing which should help small businesses is the introduction by the National Treasury of an electronic tender portal (e-portal) in April.
This should make it easier, as well as more affordable and more transparent for small businesses to do work for the government. Small Business Insight has long argued for the introduction of an e-portal (see this post on the impact an e-portal has had on small firms in Chile).
It's the uptake, silly
Contrary to what some might say (that it is not the role of a tax regime to favour small businesses over big firms) there is much tax authorities can do to stimulate entrepreneurship.
However the National Treasury's performance in this regard has been debatable. Though it's tax system is in many ways less burdensome than other peer nations (in overall tax rates and time taken to file returns*), its tax breaks have perhaps proved less effective.
Tax concessions have often been adopted by too few firms (such as the turnover tax for micro firms). Onerous criteria have often stunted the adoption of incentives (like the VC tax incentive, SBC and lately the research and development incentive too) by small businesses.
A bigger bolder focus on job-creating and innovative entrepreneurs would help, as would finding imaginative ways to get micro firms and venture capitalists to adopt their respective tax breaks.
*For data on average time taken to file a tax return by country see World Bank's Doing Business Report 2015. For tax rates see KPMG's corporate tax rate table.
Stephen Timm is a